Glossary of Finance and Accounting terms

Why it's Important to know these Terms

Mastering Finance: The Crucial Glossary for Success

In the world of finance and accounting, it’s essential to have a strong understanding of the terminology used to communicate complex concepts. That’s why a comprehensive glossary of finance and accounting terms is an invaluable resource for anyone who wants to navigate the financial world with confidence. From understanding basic concepts like profit and loss to more complex financial ratios and statements, having a clear understanding of these terms can be the key to success in both personal and professional financial management.

Accounts Payable (AP)

Financial obligation of a business to its vendors or suppliers, arising from the acquisition of goods or services on a credit basis.
Accounts Receivable (AR) Funds that a business is owed by its customers for goods or services sold on credit.
Accruals Accounting entries that recognize expenses or revenues when they are incurred or earned, regardless of when payment is actually received or made.
Accrued interest Interest that has been earned but not yet paid or received.
Adjusted Gross Income (AGI) Total amount of income earned during the year, minus certain deductions and exemptions.
Amortization Process of spreading the cost of an intangible asset (such as a patent or trademark) over its useful life.
Asset Anything that a business owns or controls that has value, such as cash, inventory, or equipment.
Audit An independent examination of a company’s financial records and systems by an external auditor to determine if they are accurate and in compliance with accounting standards.
Balance Sheet Statement of financial that summarizes a company’s assets, liabilities, and equity at a specific point in time.
Bank reconciliation Comparing a company’s bank statement with its accounting records to identify any discrepancies.
Break-Even Point Level of sales at which a business’s revenue equals its total costs, resulting in neither a profit nor a loss.
Book Value Value of an asset as recorded on a company’s balance sheet.
Bond Debt security in which an investor loans money to an entity (such as a corporation or government) for a fixed period of time at a fixed interest rate.
Budget Plan that outlines a company’s expected income and expenses over a specific period of time.
Capital Money invested in a business by its owners or shareholders.
Capital expenditure Expense that is incurred to acquire or improve a long-term asset, such as property or equipment.
Cash basis accounting Method of accounting that records revenue and expenses when cash is received or paid.
Cash Flow Amount of cash that flows in and out of a business during a specific period of time.
Cash flow statement Shows the inflows and outflows of cash from a company over a period of time.
Closing the books Equalizing revenue, expense and income statements to ensure financial accuracy
Cost accounting Tracking and analyzing the costs of producing a product or service.
Cost of Goods Sold (COGS) Direct costs associated with producing or delivering a product or service, such as materials and labor.
Credit Entry in a financial record that increases a liability or equity account.
Debt Money that is borrowed and must be repaid with interest.
Debit Notation within a financial ledger that raises the value of an asset or an expense account.
Departmental accounting Practice that shows the revenue, expenses and income of each department within an organization
Depreciation Reduction in the value of an asset over time, due to wear and tear or obsolescence.
Dividend Portion of a company’s profits that is distributed to its shareholders.
Dividend yield Dividend per share divided by the stock price, used to measure the return on investment in a stock.
EBITDA Earnings before interest, taxes, depreciation, and amortization, used to measure a company’s operating performance.
Equity Segment of a corporation’s assets that is possessed by its stockholders.
Expense A cost incurred by a business in the process of generating revenue.
Financial leverage The use of debt to finance a company’s operations or investments.
Financial Statements Reports that summarize a company’s financial performance and position, including the income statement, balance sheet, and cash flow statement.
Fixed Asset A long-term asset that a company uses to produce goods or services, such as equipment or property.
GAAP (Generally Accepted Accounting Principles) The set of accounting standards and guidelines used by companies to prepare financial statements.
General ledger A complete record of the financial transactions over a company’s life that an accountant posts into individual sub-ledger accounts according to a company chart of accounts
Gross Profit The difference between a company’s revenue and the cost of goods sold.
Hedge a strategy used to reduce the risk of an investment by taking a counteracting position in the market
IFRS International Financial Reporting Standards, a set of accounting standards used in many countries outside of the United States.
Income Statement A financial statement that shows a company’s revenues, expenses, and net income over a specific period of time.
Inflation The rising costs of goods and services
Insured account An account at a bank, savings and loan association, credit union or brokerage firm covered by a federal or private insurance organization
Intangible asset An asset that has no physical form, such as intellectual property or goodwill.
Interest The cost of borrowing money.
Internal audit An audit performed by a company’s staff rather than an independent CPA
Inventory The goods that a company has in stock and available
Inventory turnover The number of times a company’s inventory is sold and replaced over a period of time.
Joint Account An account owned by two or more individuals who share equal rights to deposit and withdraw funds.
Journal A record of all transactions in the accounting system, typically organized by date and account.
Journal entry A record of a transaction in the accounting system, typically consisting of a debit and a credit to different accounts.
Last in, first out (LIFO) An accounting method for valuing inventory where the costs of the last goods acquired are the first costs charged to expense records
Ledger Book of accounts containing summaries of debit and credit entries that is essential for preparing a company’s financial statement
Leverage the use of borrowed funds to increase the potential return on an investment
Leverage Ratio A measure of a company’s debt relative to its assets or equity
Liabilities Company’s financial obligations or debts to other parties
Liquidity Ability of a company to meet its short-term financial obligations
Loan A sum of money borrowed by a company or individual that must be repaid with interest
Margin Difference between the market value of an asset and the amount of debt used to finance it
Marginal cost The cost of producing one additional unit of a product or service.
Market Capitalization Total value of a company’s outstanding shares of stock, calculated by multiplying the current stock price by the number of shares
Mutual Fund A type of investment fund that pools money from multiple investors to purchase securities
Net Income Company’s total revenue minus its expenses and taxes
Net worth The value of a company’s assets minus its liabilities, also known as shareholders’ equity.
Non-Current Asset an asset that is not expected to be converted into cash within a year
On account/on credit A purchase that the buyer pays later but that the buyer can use immediately
Operating Expenses the costs associated with running a business, such as rent, salaries, and utilities
Operating Income a company’s revenue minus its operating expensesOverhead – the indirect costs associated with running a business, such as administrative expenses
Payroll Total amount paid to employees for their work, including salaries, wages, and benefits
Profit The amount of money that a company earns after subtracting all expenses from revenue.
Profit Margin Percentage of revenue that remains after deducting all costs and expenses
Profit and Loss (P&L) Statement a financial statement that shows a company’s revenues, expenses, and net income over a specific period of time
Quick Ratio measure of a company’s ability to meet its short-term financial obligations, calculated by dividing its current assets (excluding inventory) by its current liabilities
Ratios comparison of two or more financial variables to help analyze a company’s financial health
Receipt A document that proves a buyer has paid for a product or service, that customers keep for their records and businesses use in business-to-business dealings and stock market transactions
Retained earnings The remaining cash after paying all outstanding bills and distributing shareholder dividends
Return on Investment (ROI) a measure of the profitability of an investment, calculated as the profit earned divided by the amount invested
Revenue the income earned by a company from the sale of goods or services
Securities financial instruments that can be traded, such as stocks, bonds, and options
Securities and Exchange Commission (SEC) A government agency that regulates and oversees financial markets and securities.
Solvency Company’s ability to meet its long-term financial obligations, calculated by dividing its total assets by its total liabilities
Stock a share of ownership in a company
Stockholder an individual or entity that owns shares of stock in a company
Straight-Line Depreciation Method of calculating the depreciation expense of an asset by dividing its cost by its estimated useful life
Tax A financial charge imposed by a government on income, goods, or services.
Tax deduction An expense that can be subtracted from taxable income to reduce the amount of tax owed.
Taxable Income a company’s income that is subject to taxation
Trial balance Report that lists all accounts in the general ledger and their balances to ensure that debits equal credits.
Treasury Stock stock that a company has repurchased from its shareholders
Underwriting the process of evaluating and assuming risk for an insurance policy or investment
Unearned revenue A liability that arises when a company receives payment for goods or services that have not yet been delivered or performed.
Unit of account A standard monetary unit that is used to measure and compare the value of goods and services.
Unrealized gain/loss An increase or decrease in the value of an asset that has not yet been sold or realized.
Valuation the process of determining the worth of an asset or company
Variable Cost Variable cost is one of two main types of costs that a company incurs when it produces goods or services. Variable costs vary with the amount of production and may include labor, commissions and raw materials.
WACC (Weighted Average Cost of Capital) the average cost of all the capital a company has raised to finance its assets
Working capital difference between a company’s current assets and current liabilities, used to measure its short-term liquidity.
Write-off An action that businesses use to account for unpaid loan obligations, receivables or losses on stored inventory with the intent of lowering their annual tax bill
Yield The return on an investment, expressed as a percentage of the initial investment.
Zero-based budgeting A budgeting technique that requires all expenses to be justified for each new period, rather than basing the budget on the previous period’s expenses.

Times have changed

Additionally, the importance of knowing these finance and accounting terms cannot be overstated for businesses. In the competitive landscape of modern commerce, staying ahead of the game means having a firm grasp of the financial trends and regulations that impact the industry. Business owners and financial managers can communicate effectively with team members, auditors, and investors, making informed financial decisions and improving overall performance. Overall, a glossary of finance and accounting terms is a critical resource that can benefit individuals and businesses alike by providing clarity and understanding in the complex world of finance.

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